This publication recently interviewed the CEO and chairman of Advanced Capital, the private equity firm in Europe that is continuing to expand its presence.

A highly-rated private equity house with a strong Italian flavour is looking beyond the turmoil in global markets to long-term returns it says are there for the taking.

As asset classes go, private equity, with its sometimes decade-long period of waiting for an investment to pay off, is one in which the volatility of day-to-day markets needs to be put into context. And this is just as well, considering the market gyrations of the past 12 months.

Over at Advanced Capital, a private equity firm founded in 2005, a contrarian approach, coupled with a refusal to go after just one or two big ideas, has so far paid rewards, says Robert Tomei, chairman and chief executive. According to recent company literature published earlier in the year, two of its generalist private equity funds of funds, ACII and ACIII, have generated returns as of June 2011 of 1.19 times and 1.20 times respectively. Advanced Capital oversees a total of around €1 billion (around $1.3 billion) of assets.

Tomei, a former Merrill Lynch and Kidder Peabody man, is in ebullient form as he sat in the recently refurbished Dover Street Arts Club in London to talk about his firm’s approach. (The firm already has a presence in London, Lugano, Milan and Luxembourg). The club is an appropriate setting in which to meet Tomei, who is very much an arts luminary. He is chairman of the advisory board of the Peggy Guggenheim Foundation, a trustee of the Solomon R Guggenheim Museum as well as a member of the Tate International Council, among other positions. Tomei is certainly well-placed to talk about the benefits – and pitfalls – of alternative investments, of which art is now such an example these days.

An Italian-American, Tomei has strong links not just to Italy, but the continent of Europe more broadly. Wealthy European families and institutions, including Italian ones, have come on board as investors, he says.

Predictions

“We remain bullish on both corporate and real estate distressed debt – we’re looking to take advantage of the enormous funding gap which is set to open up over the next few years. This means we’ll be looking more closely at debt and equity tied to real assets, which will continue to be productive, versus purely financial products which will display far more volatility,” Tomei said, setting out his general views.

“We’re also keen on the traditional energy sector, which requires ongoing investment and improvement. Forecasts put the level of required investment in the sector at €23 trillion over the next five years. We’re interested in certain elements of the technology sector; our focus is on technology with an industrial application, which provides high added value with a direct impact on efficiency and companies’ profits. We’re leaning towards investment in emerging markets, with a preference for the luxury end of the consumer market,” he said.

Tomei is certainly not afraid to put his ideas into the public domain. He believes the private equity area is still not as fully understood – or appreciated – as it should be.

“Our focus first and foremost is to protect capital, whilst seeking outstanding risk-adjusted returns. We do this by identifying specific niche market opportunities either in sectors and or geographic areas of great value, and by hiring proven managers with access to the most compelling opportunities,” he said.

“Given the turbulence of the last decade, we recognised that it was important for the firm to consistently deliver absolute positive returns and distinguish itself from the general industry by being highly aligned with our investors no matter what the market conditions. This requires the ability to think independently, and a willingness to cut against the grain of conventional wisdom – and to respond to events without being entirely shaped by them,” he said.

“However, we are increasingly seeing value in specialist sectors and promising opportunities in specific geographical areas. Thus we believe there are some areas of great value and growth potential which we intend to exploit over the next three years to beat a stagnant market,” he said.

Resilience

Private equity, and the fund-raising circuit that many general partners embark on, went through a rough time in the aftermath of the 2008 financial crisis. It appears, however, that investor appetite for the asset class is proving to be resilient. According to Preqin, the research firm, 76 per cent of a sample of 300 investors interviewed in October and November 2011 plan to make new fund commitments over the coming 12 months, while 92 per cent expect to maintain or increase their allocations over the longer term, further illustrating their confidence in the asset class. Just 8 per cent intend to decrease their exposure to private equity over the next three to five years.

Tomei argues that his firm – which oversees a total of around €1 billion of assets – is seeing an increasing amount of investor interest internationally, which will be boosted further when Advanced Capital’s offices in London open for business.

Current investors include a range of Italian and European private banks, pension funds, insurance companies and high net worth individuals, as well as foundations and endowment companies.

Risks

So what sort of risks does Tomei think are important for his type of business?

“I feel the greatest risk lies in over-commitment to any single `bright idea’, given the volatile state of the market. No matter how convinced you are of an angle of attack, any investment has to be balanced out with proper risk management, and a full and intellectually honest discussion of the possible risks,” he said.

“It’s also crucial to avoid misalignment with clients’ interests in an attempt to adjust to market conditions. We have a close relationship with our investors, and endeavour to keep their investment goals at the heart of our strategy,” he said.

This is a long-term game Tomei is playing. The funds he oversees have a duration of ten years and are structured into two equal parts. In the first part, the first five years, is the investment and fundraising period, whereby investors undertake commitments to underlying funds. Once this investment period is over, the size of the fund is determined, and investors undertake no new commitments. The underlying funds require the second period to reach their full potential. Although the duration of the funds can vary, the two-tier structure remains the same.

Advanced Capital has six funds, including three diversified international fund of private equity funds: ACI, ACII and ACIII. Also, there are three specialised niche funds: the AC Private Equity Real Estate and AC Global Energy Opportunities Fund.

Besides Tomei, the management team consists of: Federico Braguglia, managing director; Seth Lieberman, CIO for real estate (formerly with UBS; Marco Milella, special advisor (formerly with the Fiat Group), and Giovanna Cattaruzza, vice president (formerly with EBRD, Barclays Capital and SanPaolo IMI Corporate Finance).

In ten years’ time, it might be a very different European economy and investment climate that greets Tomei and his colleagues. For the moment at least, it is the long term point of view that counts.